Analysis: Americans, not Mexico, would fund wall tax plan

The tax would apply to all imports from all countries, and would be paid by American companies.

By and David LauterTribune News Service

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WASHINGTON — The White House offered a possible answer Thursday for how President Donald Trump could pay for the U.S.-Mexico border wall that was his chief campaign promise — a tax on imports that opponents say would raise prices for Americans buying groceries, automobiles and gasoline.

In a speech to Republican lawmakers in Philadelphia, Trump said the new tax plan could “generate revenue from Mexico that will pay for the wall, if we decide to go that route.”

Employees work in the Honda plant in the central Mexican state of Guanajuato. Mexico is the third-largest supplier of imports to the U.S., chiefly vehicles and agricultural products. Associated Press/Eduardo Verdugo

Trump promised throughout his campaign that he would force Mexico to pay for the wall, and he reiterated that pledge Thursday.

“I’ve said many times that the American people will not pay for the wall,” he said.

In fact, however, the plan, which House Republicans have pushed for months, would be a tax paid by American companies, not Mexicans. It would apply equally to all imports from all countries and would have no special tie to the wall, except, perhaps, in the president’s personal view of it.

But the idea appeared to gain favor with Trump on a day in which he clashed publicly with Mexican President Enrique Peña Nieto, who said he was canceling a planned visit to the White House next week because of Trump’s insistence that Mexico would pay construction costs.

Trump said that the cancellation was by mutual agreement and that the meeting would have been “fruitless” unless Mexico were to “treat the United States fairly, with respect.”

White House officials emphasized that discussions about the tax plan were still in early stages.

PLAN IN WORKS SINCE BEFORE JUNE

That’s not entirely true. House Republicans released a detailed version of the plan in June. It’s central to what they envision as the biggest reworking of the corporate income tax in decades.

The basic idea would be to lower corporate tax rates, but also to reshape the tax code so that it provides incentives for companies to remain based in the U.S., do more manufacturing here and import less. That would significantly change the playing field for American companies, improving the profits of some but hurting others. The proposal has generated intense behind-the-scenes lobbying.

Trump had criticized the plan earlier this month as too complex, but the ability to say it would pay for a border wall has apparently made it more attractive to him.

“It clearly provides the funding and does so in a way that ensures that the American taxpayer is wholly respected,” White House press secretary Sean Spicer told reporters.

Currently, Spicer said, the U.S. taxes companies on their exports but not their imports. By taxing imports, “we can do $10 billion a year” in revenue on goods and services brought in from Mexico, he said, “and easily pay for the wall just through that mechanism alone.”

Mexico is the United States’ third-largest supplier of imports — chiefly vehicles, electrical machinery, mineral fuels and agricultural products. The U.S. imported $316.4 billion in goods and services from Mexico in 2015, while exporting $267.2 billion, according to the office of the U.S. trade representative.

If Trump does decide to back the plan, he would be diving into a battle that has bitterly divided Republicans.

The import tax is key to House Speaker Paul D. Ryan’s proposal to lower the corporate income tax rate to 20 percent from its current maximum level of 35 percent. Some Republican groups, especially big importers such as oil refiners and major retailers, oppose Ryan’s plan.

The tax plan, known as border adjustment, acts somewhat like a sales tax on imports. It would affect any country with which the U.S. runs a trade deficit, meaning most of the world, and would generate about $1 trillion over a 10-year period, according to an analysis by the Tax Foundation, a conservative-leaning think tank. By comparison, the cost of the border wall has been estimated at $12 billion to $38 billion if the administration were to build along the entire 2,000-mile border, which is unlikely.

Under the plan, U.S. companies would not be taxed on the revenue they make from goods sold for export. By contrast, when they calculate the income tax they owe, they would not be allowed to deduct the cost of goods that they bring into the country. As a result, supporters say, manufacturers would be better off building products in the U.S. and exporting them, rather than importing goods for sale.

LINING UP AGAINST THE PLAN

Oil refineries, retailers and other large importers have lined up against the plan, fearing that the inability to deduct the cost of imports from their tax bill could eat heavily into their profits. The influential Koch brothers, whose fortune derives from oil refining, have helped lead the charge against the Republican plan.

By contrast, big exporters such as domestic crude oil producers and makers of machinery would see their tax bills fall.

“If you’re a Boeing, you’ll probably be pretty happy about it,” said Kyle Pomerleau, director of Federal Projects at the Tax Foundation.

Most major economies have value-added taxes with border adjustments that work in a somewhat similar way to the Republican proposal. The U.S. is one of the few countries that taxes export income, but not imports.

Opponents of the plan say that companies would pass along the cost of the tax, charging consumers more for a wide range of imported products, including Mexican goods such as avocados, tomatoes and beer.

ECONOMIC GROWTH WARNING

“Any policy proposal which drives up costs of Corona, tequila, or margaritas is a big-time bad idea,” Sen. Lindsey Graham, R-S.C., tweeted, warning that the proposal could be a drag on economic growth.

Supporters of the tax plan disagree. One effect of Ryan’s plan would be to raise the value of the dollar, most economists say. A stronger dollar would make imported goods cheaper because the dollar would be worth more pesos, yen or euros. That would offset the effects of the tax, economists say.

Spicer said that revenue generated by the plan could also be put into other border-security measures, which would stem the flow of cheap labor across the border.

He later told reporters that details could change as Trump and Republican congressional leaders debate tax reform, and that Trump’s apparent endorsement of the plan was meant more as a response to critics who doubted the administration had credible options to ensure the cost of the border wall would be paid in some form by Mexico, as promised.

“Instead of 20 percent it could be 18; it could be 5,” Spicer said of the import tax threshold. “But the idea is to say … ‘OK, here’s one idea that gets it done.'”

The Republican-led Congress plans to tackle tax reform in the spring and summer. They intend to use special budget rules to avoid a filibuster in the Senate, and aim to finish by August.